Jack Mintz: Adapting to new reality of longer lives

Politicians are caught between a rock and a hard place as ­population ages

Over four years ago, Lehman Brothers declared bankruptcy, resulting in a collapse of stock and bond markets by over 40% and shaking the confidence of economies around the world, including Canada’s. With declining finances and large pension losses, Canadian retirement wealth took a nosedive. Instead of looking forward to golfing and travelling, many retirees had to reconsider their options, including working for a longer period or making do with less.

With the Great Recession of 2008-09, Canadian governments also ran up public deficits to counteract a credit crisis. The looming demographic crunch with a retired population increasingly dependent on public transfers from more heavily taxed younger workers became less affordable as sovereign debt piled up.

So is today’s picture as bad as four years ago? The story is a mixed blessing with some good and bad news.

Canadian household wealth has recovered to a large degree as net assets per dollar of disposable income have almost returned to 2007 levels. This is quite unlike the U.S. experience, where housing prices remain almost 30% below the 2007 peak. Canadian net wealth per dollar of disposable income is now higher than in the U.S., with the latter falling to early 1990s levels.

Debt as a share of household assets has also risen from about 17% in 2007 to 20% in 2011. Mortgage debt, the most important form of consumer debt, has risen from 29% in 2007 to 32.5% of housing values in 2011.

As for elder poverty, Canada can still boast having one of the lowest levels among OECD countries (somewhat above 5%), even though the incidence has increased slightly. Nonetheless, single elders living on their own have a much higher incidence of poverty at 14%.

All this suggests that politicians are caught between a rock and a hard place. On one hand, governments need to reduce unfunded liabilities, including those associated with public pension funds and health care, to avoid sharp tax increases on the young working population in the future. On the other hand, leaders will be pressured to further support the elderly poor with fixed incomes, especially if Western countries inflate their economies to manage public debt burdens.

Obviously, there are no easy answers, but one is available. Canadians already recognize that public policies should adapt to a new reality whereby we live longer and could gainfully contribute to society for a longer time too. This well-understood perception provides a unique opportunity whereby governments can reduce fiscal pressures while at the same time ensure public policies are in place to protect the elderly from ­poverty.

To begin, it makes a lot of sense to increase the age of eligibility from 65 to 67 years of age for many public programs, as recently introduced for Old Age Security and the Guaranteed Income Supplement. While none of the existing or near retirees are affected, increased age eligibility will help make programs more affordable in the long run.

Many public benefits for the elderly were developed at a time when people lived few years beyond their retirement. Old Age Security itself was introduced 60 years ago with an age eligibility of 70 years, even though expected lives were little different.

Policy need not stop with this change. Eligibility for aged and pension income credits, public pensions for employees and the Canada Pension Plan could also be increased over time, saving federal and provincial governments gobs of money for other critical priorities.

These other priorities could include tax reforms aimed to generate more savings and improve Canada’s productivity so that more economic activity can support public services through taxation.

For example, the age of eligibility for contributions to RRSPs could be increased from 71 to 75 years. Required withdrawal rates from locked-in RRSPs and RRIFs could be reduced so that Canadians can make sure that they have some wealth available should they live longer than expected. None of these changes have a significant impact on government revenues, but they would encourage Canadians to use up their existing RRSP room with more flexible arrangements.

Public savings from increasing the age of eligibility can be used to boost GIS payments to counter poverty among the elderly, especially singles.

And public savings could be devoted to tax reform aimed at reducing the ­burden on younger Canadians who unfairly lose benefits that are currently available to existing elderly Canadians. As I have argued in these pages, Canada should consider taxing ourselves like Swedes under a dual income tax system, whereby unsheltered capital income is taxed at a uniform low rate. A low tax rate on savings would be particularly important to many young people today who have time to accumulate wealth for retirement purposes. Increased Canadian savings over time will also encourage investments by those businesses that have less access to international capital markets.

In fact, tax reform should become the mantra for Canadian governments today with a focus on productivity and demographic issues. Instead of policies that blindly raise tax rates and introduce new tax preferences to complicate an already overly complex tax system, we should look at taxes that can be fairly and more simply assessed on a tax base reflecting current realities.

Financial Post

Jack Mintz is a professor of public policy at the University of Calgary.

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